Q4 2020 Resolute Forest Products Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Resolute Forest for dogs for what's our results conference call.
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I would now like to hand, the conference over to Mommy Omni mush. Thank you. Please go ahead Madam.
Good morning, welcome to results fourth quarter earnings call. Two day, we'll hear from non President and Chief Executive Officer, and if you need not only senior Vice President and Chief Financial Officer.
You can follow along with the slides for today's presentation by logging onto the webcast using the link in the presentations and webcast page under the Investor Relations section of our website and you can download the slides today's presentation will include non U S. GAAP financial information our press release in the appendix for this line.
A reconciliation of non-GAAP information for U S GAAP financial measures.
We will also make forward looking statements for one.
Looking information is based on our current assumptions beliefs and expectations all of which.
Which involves non real business risks and uncertainties and can change as conditions do please.
Please review the cautionary statements in our press release and on slide two of today's presentation and will turn the call over to eat adjusted.
Good morning, and thank you for joining us.
Good day reported $329 million of adjusted EBITDA in the fourth quarter.
For $40 million from.
Our results reflect strong pricing for lumber and wood.
Wood products segment's ability to drive bottom line impact with strong end markets.
Those we've seen in the second half of 2020 with the rebound.
U S housing sales and robust demand for rebuilt.
We also in order for decrease in paper shipments in the fourth quarter seemingly the growth related recovery for those markets as other.
Great.
Well it remains unclear, whether there would recover enough to justify restarting capacity, we temporarily idled.
The rapid growth in demand or any other ship of the pandemic.
This is carlin and <unk> mills for which we recorded non cash charges of $80 million in the fourth quarter.
By segment.
We reported quarterly adjusted EBITDA growth.
To me those over other marketable for St.
Water.
$2 million for tissue don't buy for being on bars.
With products wasn't changed at $139 million.
You can see $1 million for paper done by some other media.
Yeah.
For the whole year, adjusted EBITDA was $338 million compared to $213 million.
19.
The benefit from those reflects a significant increase in other pricing.
Net contribution of the U S. Obviously, we acquired early in 2020.
Lower overall manufacturing costs.
Our performance from the tissue segment.
But it also reflects an unfavorable effect on global pulp and paper pricing and lower paper shipments.
The average U.
The economy impacts from defending it.
Let's review our answers are segments, beginning with market Paul.
Global demand for chemical market pulp in 2020 rose by four percentage from November compared to 2019 with.
With demand for hardwood, increasing by 8% and softwood decreasing by 2%.
You mentioned, China rose by 9% and 6% in North America.
Key tissue consumption during the pandemic outpaced global printing and writing demand.
The 100 demand push producer inventories.
The normal range.
Seven days for had a weighted towards between 33 days for softwood.
November.
In the quarter.
Average transaction price improved by $3 per metric ton.
Due to softer pricing for from pulp and recycled bleached, Kraft pulp, which offset incremental gains in Hollywood.
Our shipment increased by 11000 metric tons and finished goods inventory.
<unk> 3000 metric tons at year end.
Historical.
Through December <unk> at home tissue demand grew by six 2% compared to 2019.
Just to address shifts in consumption patterns caused by the pandemic.
But by the same token.
The other way from home market has been far more challenging as demand dropped by 90%.
We've got nice price pricing for parent rolls in the colder products continued to improve quarter over quarter, we talked before.
Our own customer portfolio for mix optimization.
Our reported as recently as Richard price, driven by $77 per short tons or 4% this quarter because of the current rule to stoping initiative and productivity gains on the casualty submission.
In December.
We completed the acquisition of converting facility located in Hagerstown, Maryland with trees that tissue with power converting lines.
The Hagerstown asset would improve our quarterly capacity.
Extend our product offering and expand our territory to jet for chip northeast market.
Despite the sluggish at the DUC water is tissue.
The segment did make $70 million EBITDA goes from <unk>.
And we expect it will continue to improve.
For quarter using all these sales reached one 6 million on a seasonally adjusted.
And it was business up by 11% compared to the previous quarter.
With single family homes, which consume more number of by Twitter for Southern <unk> stone by two weeks.
Other prices have come off their recent highs for both bid went through the quarter don't buy as much as $450 per total board feet from Beacon sundries, but despite the expected seasonal slowdown.
It's not back later in the quarter on strong demand.
As a result.
We closed the fourth quarter with an average transaction price relatively unchanged compared to the third quarter.
Slightly by $8 per thousand board feet to $608.
Shipments also rose by 5 million board feet.
Previous quarter, reducing our inventory Richard 97 million board feet, which is historical.
Hello and current.
Capstone investment over the last few months, we started bringing the El Dorado saw mute online in December.
We expect to start setting its up with mid quarter in line with previous expectations.
We are also making plans to bring Op Inc.
<unk>, specifically at northwestern Ontario back to what shifts operations in the coming weeks in light of market conditions.
As we've said many times before.
Funding mix has been particularly for marketing depends on paper products.
In 2020 total rig demand for Oracle doesn't mechanical papers and your spreads fell by 23% and 29% respectively from.
2019.
She broke on other grades dropped by 29% and started our wide rates fell by 17%.
Global newsprint was down by 23% in the year.
All of this push operating rate offers.
Certainly moving.
In 2020, forcing capacity reductions.
We reduced our older provision their footprint to adjusted dependent.
The revenue prediction and economic activity.
I think capacity, including two newsprint mill since the spring.
Representing an aggregate 28% of run rate paper capacity.
Accordingly.
We recorded 143000 metric tons of downtime in the quarter.
And over 500000 metric tons in the year.
But the smelter.
To run our remaining assets to capacity and therefore maximize the operating efficiency of our very competitive asset base.
And to control, our inventory all of which together.
Withstand the profound shock of the pandemic operating out of both the breakeven level.
We expect the overall paper pricing touched bottom.
In the quarter, leading to a reduction in our average transaction price by element.
Our 2% call for today.
Third quarter.
But shipments improved by 403000 metric tons in inventory fell to 96000 metric tons.
EBITDA for the quarter segment was <unk> million.
Sure.
I would now have room to discuss our financial performance. Thank you.
Reported net income of $45 million in the fourth quarter or <unk> 55 per diluted share. Excluding special items. This compares to net income excluding special items of $62 million for 72 per diluted share in the previous quarter and a net loss excluding special items.
53 million or <unk> 59 per share in the same period last year.
Special items in the fourth quarter include $80 million of charges related to the temporary idling of the <unk> and Amos newsprint mills non.
Non operating pension and other post retirement benefit oral cap costs of $24 million.
Foreign currency translation loss of $13 million for net monetary liabilities and other expenses of $15 million.
Total sales in the fourth quarter for $769 million up by $39 million compared to the third quarter on higher shipments for all business segments, but mostly paper.
Manufacturing cost rose by $23 million in the quarter after removing the impact of volume and foreign exchange.
Compared to the third quarter. The all in delivered cost for market pulp was essentially unchanged up by $2 per metric ton.
EBITDA in this segment was also unchanged at $2 million.
The delivered cost in tissue increased by $112 per short ton or 6% and the average transaction price declined by 4% due to the higher percentage of parent roll sales when the destocking effort at California.
EBITDA for this segment decreased by $4 million to $2 million.
In the wood products segment, the delivered cost rose by $12 per thousand board feet or 3%, mostly due to higher stumpage fees for our Canadian operations, which track lumber prices as well as higher maintenance costs.
EBITDA was unchanged at $139 million.
Papers delivered cost remained relatively unchanged, despite higher maintenance costs and lower internal power generation as shipments increased by 12%, but the average transaction price for the quarter slipped by 2% EBITDA for the segment came in at negative $1 million.
We reported a credit under the Canadian emergency wage subsidy program in the quarter based on the drop in revenues in our pulp and paper segments through the end of October due to the pandemic.
We're using this credit to partially offset the additional costs associated with keeping our Ams and backup pulp mill in hot idle mode.
On Tuesday, we closed a private offering of $300 million of unsecured senior notes due 2026 with a four and a seven 8% coupon issued at 100% of par value.
We used the proceeds from the offering together with cash on hand to redeem all of the $375 million.
Aggregate principle amount currently outstanding of our 5% and 78% senior notes due 2023 at par.
This refinancing allows us to deleverage the business and reduce our interest burden gained more flexible terms and covenants and at three years of maturity runway in our capital structure.
Concurrent with the refinancing activities, both Moody's and S&P revised the trading credit rating outlook from negative to stable.
With the strong EBITDA from lumber and a $122 million working capital release in the quarter, we generated $158 million of cash from operating activities in the quarter.
Accordingly, our cash position closed at $113 million at year end.
We also used our strong financial position to repurchase an additional $2 1 million shares of our common stock in the quarter for a total spend of $10 5 million for.
For the year, we spent $30 million to repurchase six 9 million shares over 8% of the <unk>.
Total outstanding.
Net debt fell by $93 million to $448 million by year end, bringing our net debt to last 12 months adjusted EBITDA down to one three times, our liquidity also improved by $216 million to 693 million.
In part due to a new 10 year secured delayed term loan facility for up to 220 million Canadian dollars, which is undrawn.
We made $78 million in capital expenditures for the year for 2021, we expect to spend approximately $90 million to $100 million and net capex.
We made $29 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $243 million, which is reported in other assets on the balance sheet.
During the fourth quarter, we contributed $51 million to pension plans, which as previously disclosed included a $34 million catch up contribution to U S plans deferred from previous quarters under the stimulus Bill.
We also made OPEC payments of $3 million with a combined expense of $9 million included in adjusted EBITDA.
We made $108 million of pension contributions and all of 2020 and $11 million of OPEC payments.
Our balance sheet net pension and <unk> liability increased by $102 million from year end 2019 to $1 6 billion.
The increase is due to the unfavorable impact of a 50 basis point drop in the applicable U S. GAAP discount rate over the course of the year.
As most of you know, we think about our net pension liabilities in terms of the funding deficit calculated in accordance with applicable pension legislation. Because this is what determines our annual contributions.
Using discount rates that more closely resemble our return on assets. The funding deficit stood at $629 million, a year and slipping by $132 million in the year due to the 50 basis point reduction in applicable discount rates.
Accordingly, we expect debt for 2021, our annual contributions to pension plans will increase by roughly $15 million to $120 million plus $12 million of OPEC.
After the well documented pandemic induced challenges of 2020, there are a number of encouraging signs to carry our recent momentum into 2021 across all four of our businesses.
We expect that the strong level of U S housing starts and healthy repair and remodeling activity will provide a tailwind for lumber markets for at least some time to come even if prices come off their recent highs.
We're also encouraged with the recent pickup in pulp demand against lower industry inventories. After the prolonged lack the bulk of the significant overbuilding in producer inventories in late 2018, especially hardwood in Latin America.
With the quality and competitiveness of our remaining paper assets. There is room to build with pricing on the fourth quarter volume gains as publicly reported as end markets gradually rebalance after the steep pandemic induced demand drop by 2020.
For tissue, we will continue to drive performance improvements in the business with better portfolio mix and operating efficiency.
I'm excited to assume a leadership for this company in just a few weeks I've spoken with many stakeholders since my nomination and I'm encouraged by their response the energy around the Resolute story and the talented team that will move this business for our job now is to accelerate our evolution to generate long term valley.
For shareholders and to drive sustainable economic activity and the communities, where we operate let.
Let me take a minute as we closed a wish ive, a happy and healthy retirement after almost 40 years with resolute and its predecessor companies.
After helping to build the lumber business to where it is today. He is closing his career after a very eventful three years as CEO from the highs of 2018 to the very choppy waters, an existential scare the pandemic has been a steady hand at the tiller.
We set a course to make us a better company and help to it leading by example every step of the way with a tireless and Sublets work ethic.
Just on cost reductions and difficult times, and our long term efficiency enhancements and better ones. He made resolute a stronger more competitive organization.
<unk> word and a resolute in turns reflects this transparency and integrity on behalf of everyone at resolute.
Thank you.
Thank you Remy.
We are moving the rig the COVID-19 storm with particular strength.
Im proud of our commitment to health and safety as well as for both for the communities in which we will can leave.
We continue to enhance the already meaningful relationships across our operating communities.
Over the years together, we have taken important steps in our transformation and build a more sustainable and competitive organization.
One thing to so many people in the.
Forest products industry, who have supported me during the old moving 40 last years.
I know that's resolute is going to be in good hands with Cu and supported by a strong team at all levels of the organization debt.
We leave it for.
Thank you.
This concludes our formal presentation operator.
We will now be open for you.
Other questions.
Thank you.
A reminder to ask a question you will need to press star one on your silicon So.
So we draw your question press the pound all husky.
Please standby, while we compile the Q&A Ross Sir.
Your first question comes from <unk> Patel CIBC capital Your line is open.
Hi, good morning.
Amir.
Good day could you give us a sense as to how much COVID-19 has affected your ability to increase lumber production and has that varied between Canada and the USO.
You mean, you mean, increasing the capacity.
Yes, I'm just curious how much of a constraint.
Maybe COVID-19 from a labor disruption standpoint has been.
Of course, you know what we have we have had a crossroads with.
Pieces Covid gives us a pretty much all facilities pulp and paper and lumber as well so.
It's slowed other little operation that.
What we had in the U S.
Regarding shifts but on impact on productivity for sure in Arkansas.
Did it have any impact as we said earlier on the restart.
As already though.
So.
Sometimes we have to slowed ownership for two but thus far as capacity.
Cash and company.
Hi.
I think shift going for that.
We can do we don't know when the people are back so.
I would say from the pure volume.
We don't see a net back.
Sure.
Okay. Thanks, that's helpful and GTC.
Do you see potential for <unk>.
North American tissue price hike.
I mean, I'm, just thinking given the significant moving and.
In pulp prices and the fact that most of the industries non integrated.
The charge for sales.
But as demand right now between the at home and away from home so.
And what we're trying to manage both right now.
Of course.
The pulp is going to have an impact on the cost of the.
Of the tissue operation.
For just for us for the whole industry, but unfortunately, we are integrated.
Okay. Thanks, that's helpful and debt.
Just a question for you I'm just curious as you look to some other changes that you might look to make in the first year as CEO.
So.
Where do you see when you think other portfolio are there additional.
Assets that <unk>.
Do you think you could look to monetize this year.
We always keep an eye on accident year I would tell you that.
We've done some moves in the past to try to optimize and balance our portfolio.
We might look to it I think what I would say, though to your larger question my priorities essentially moving forward.
Hard to keep the focus and disciplined around capital allocation I think thats going to be very important as we move forward and if we do decide to monetize some assets.
Then focus on taking a little bit more leverage out of the business I do want to focus on encouraging growth, especially as we look to replace the diminishing EBITDA coming from paper I think there is potentially a couple of things we might look at either bolt ons or extensions in the lumber segment Ive talked to.
About the importance of continuing to integrate and grow our U S assets in the U S. The El Dorado saw mills coming online, so thats going to be able to important to push that forward and also the restart of big day. So we can get some a bit of capacity growth there and I do want to focus on maintaining a fanatical focus on asset performance for us.
Our pulp portfolio, consistent with resolute history and reputation as being excellent operators.
Great. Thanks. Thanks for me, that's that's all I had and.
All the best in retirement.
Thank you Amir.
Your next question comes from Paul Quinn of RBC capital markets. Your line is open.
Yes, thanks very much good morning, congratulations for your 40 years.
Almost 40 years there while the changes you must have seen through that company.
And we'll give you mind blowing.
Maybe started the wood products side just.
The additional volume you expect to get in 2021 through the restart of big Nathan and startup of the El Dorado what is that.
Thanks.
I mean, the other year.
Run rate with sales.
Global towards where the two other renewable feed so if I think we're going to restart on one shift at the beginning with <unk> and the capacity that was both other the other 85, so of course different mixed but stable at that day.
Yes.
And then we've seen this big run up in pulp prices.
Looking at global inventories are still pretty high just wondering what you expect in the coming quarters in terms of your realized price they come up and how sustainable is the current market.
Hi, Paul I'll take that one so.
We looked at the PPC stats and certainly there is a lot of.
Room in the corridor of what is normal, but when you look back over the bill that occurred late in 2018.
I think at one point, we had one 5 million extra tonnes of capacity sitting on the market and Thats largely worked its way through so we're seeing a pretty strong pickup in demand our own inventories also very very low.
So in the business that we're doing now.
We are seeing a pickup in activity and pricing in the pulp segment and we should start to realize that in the first quarter. So we see conditions is pretty encouraging now.
Yes.
Okay, and then just lastly on the papers side, you guys have taken quite a bit.
Downtime in the sector I guess you've got.
And day comment Hot idle.
Plan going forward is there.
Planning on permanent shuts for restarts of these facilities.
What is our plan here.
Let's see.
We said we are hitting the meals zillow and we have two machines on newsprint and Docomo in London.
One enable us so.
We see what's going to happen both on the market of course for the whole.
To say that because we're going to restart all that thought Asia newsprint by be difficult, but we also will have people and community is looking for diversification. So.
We don't have the answer yet, but a portion of its other studies zone right now so thats both newsprint.
So we also will have us.
What's the per machine that are smaller that we are using right now that we took total in their back so.
With the assets we have.
To the best we can but to answer your question.
We don't really know what the market is going to do going forward.
Alright, that's all I had but other volume.
Thanks, Paul.
<unk>.
Your next question comes from Keith Carpathia of TD Securities. Your line is open.
Hi, good morning, everyone as cash flow.
Filling in for Shaun.
Okay.
Hi, Good morning, Rami already provided some good context for our capital allocation just wanted to circle back quickly.
So in some of our strategic initiatives are concerned you talked about lumber anything on the pulp side that youre looking at.
Well, what we focused our efforts on in the last couple of years cash flow is really improving the operations that we have as you know we've got two fantastic pulp mills in Canada, and safe to say in Thunder Bay, and we've invested two two.
To provide for incremental capacity growth, specifically in Saint <unk> and Thats been very very good for us. So we will continue to focus on our pulp mills for incremental incremental capacity growth and generating more value from the assets. We have with cost reduction that's what I see on the immediate term for pulp.
Okay, and any number that you can quantify in terms of that incremental capacity growth that you have.
No not necessarily it's always like the investments that we've made in safety DCA was about 40000 tons over the last couple of years of improvements and we're seeing that in the throughput today and its encouraging so we continue to chip away at it and improve wherever wherever we can.
Got you, Okay, and just going back to Paul's question around the El Dorado and Agnes restarts. When do you expect those to be running at the full run rate that you mentioned.
As for the Dorado as I mentioned, we started in December. So we are ramping up for the second ship share ownership as we go.
We're trading day for US right now so we.
We expect by the end of the second quarter to be pretty much starting from two shifts so of course for <unk> and ramping up book.
Between the second into the third quarter, we should be for production as far as the usage could be should be pretty fast as strong as when we started we were talking about a price.
Smaller <unk> stud mill, so one shift so I believe that volume months, we'd be we'd be.
Back at where we should be.
And for you guys point for you Mr anything from more than one shift eventually down the line rate later this year maybe.
Yes.
Yes, okay.
Great and EBIT. Thank you mentioned it is from <unk>.
For downtime this quarter I didn't quite catch the number would you be able just to repeat it.
It's a 143000 that we put in the market downtime kasha and that represents the two mills in Amis in vehicle mode.
Machine and almost one.
Got it okay.
And just the last.
Question on markets, maybe any listing prices move.
Higher in North America, and there's some.
Higher price is going on and then for key markets offshore as well any context, you can provide just around those markets, where you see things trending over the last for a little while.
Well from our perspective, we certainly saw in the fourth quarter, an increase in shipments of 43000 tonnes, which was a welcome change from the 30% drop in demand that we've been we've been living through so I think thats working its way through demand is starting to come back and it's getting reflected.
As I said with wood shipments that we see it in pricing as well. So I mean, the task for US is just to make sure that we're optimizing the network for keeping our inventory load.
And try to satisfy customer demand wherever we can.
And be a good spot.
Okay, Great. Those are all the questions I had thanks very much thank.
Thank you thanks Gotcha.
Your next question comes from the normal part of Scotia Bank. Your line is open.
Great. Thank you first of all Ive I want to add my voice to congratulating you on my retirement and that EMEA, obviously congratulations.
Youre elimination as well.
Good morning.
Wishing board of you all the best in this new chapter of your life quick.
Quick one for me on the tissue side, just wanted to understand how we can reconcile the fact that the average transaction price actually decreased due to a higher percentage of parent rolls, but at the same time, we had actually 6% higher.
Average delivered cost sites out there producing more roles would have also triggered a reduction.
<unk> costs.
For the transaction price for apparel is obviously significantly lower than converted goods what happened over the course of the last couple of quarters as debt productivity for the tissue machine in Calhoun is increased and so we were building up inventory and we decided in the fourth quarter to reduce debt.
<unk>.
To just be more efficient so by doing that it reduces the average transaction cost I would tell you that.
There are there are costs that we also picked up in the fourth quarter onetime costs that played into the average delivered cost as well. So when you work all that through its how you end up with the $2 million of EBITDA as we said $2 million is a bit sluggish for the tissue business in the fourth quarter.
And we think we can do better and we expect that we will.
Okay. So looking forward.
The addition of debt still converting capacity plus the absence of debt.
Inventory reductions so we should expect.
Average everything else kept equal better prices and better cost and looking in coming quarters versus what you're trying to force that's.
That's correct. That's correct. So we did $17 million of EBITDA in 2020.
By bringing the Hagerstown assets into our portfolio. It is going to allow us to increase the roles. The parent rolls that we convert out of Calhoun improved distribution of the business. If you look at the trend and we've got a slide in the deck that shows you for the tissue business the progression that we've made.
Over the last two years with pricing.
It's pretty clear, we've been focusing significantly on customer portfolio optimization and improving our mix and you can see that in the segment. So I think for fourth quarter was really more of a onetime thing is as we said, we destock and so took the hit on pricing, but the momentum we think as they're in the business can do better than it did.
In the fourth quarter.
Great. Thank you that's it for me.
And similar losses.
There are no further questions at this time I will turn the call back over to the presenters.
Thank you for joining us day after day.
Thank you everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Welcome.
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Sure.
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